Thursday, July 5, 2012

Blockbusting: Real Estate Brokers and the Dynamics of Segregation
INSEAD Working Paper 2012/66/EPS revised version of 2011/37/EPS

The paper presents a continuous-time dynamic model of a neighborhood in racial transition as triggered by a fee-motivated real estate broker. Racial transition occurs in an initially all-white neighborhood when the broker steers white sellers towards black buyers. Racial transition leads to a higher turnover in the neighborhood, but also leads to lower prices. Thus the broker faces a trade-off between higher turnover and lower prices. We show that racial transition will occur only when (i) white households have moderate racial preferences, (ii) the value of housing outside the neighborhood for black households is low, (ii) the broker is moderately patient, (iii) the rate of arrival of offers is moderate, (iv) the number of brokers is limited. Otherwise, the real estate broker steers white households towards white buyers.